In Forex, what is pyramiding and rules against it?

I read some article about pyramining and some rules that prohibit or restrain them.

The way that I understand, pyramining is adding to an existing position in the same direction.

My English is not perfect, and I would like to get some info about that and technical bylaws rules that controls them.

Any info greatly appreciated

Martin

Pyramiding profitable positions - good.
Pyramiding losing positions - bad.

Let's say you took every inside bar in a recent EUR/USD daily bull run and let's say a few of them were runners. If you had moved your stop loss into profit, you might use that unrealised profit as the risk on your next trade on this pair. If that were succesful then it could be repeated, thereby potentially increasing your profit while leaving your main capital unexposed to a higher leverage or exposure to a particular currency/pair.

That is my understanding of pyramiding and it's something I plan to do! As far as I know there are no rules or restrictions governing how this can be done.

It's not the MM that makes pyramiding a potentially successful strategy in fx. It's the way in which it's applied to certain types of price behavior.

By way of proof by analogy, using a pyramiding strategy in roulette will not work profitably. The house always will eventually win, no matter what MM the punter uses, because the '0' and '00' give it an edge, and because (unless the wheel is biased) reds and blacks occur in a precisely random 50/50 distribution.

Pyramiding can potentially work profitably in fx because the occasional trends that occur are qualitatively different to any 'trends' of reds or blacks that occur in roulette. It is these market trends that provide the opportunity of an edge. The notion that pyramiding works simply because one is using previous profit to offset present risk is a fallacy.

Not really pedantic and well worth adding...

and its called pyramiding because you always add smaller positions to your bigger existing position...therefore pyramid Not the other way around!

Well said. The general rule for building a pyramid is that each new column added is smaller than the last.

Pyramiding in trading usually has an initial position size which is larger than the added sizes. This helps with offsetting risk as the trend grows and limits exposure to the top end as the trend may be fading out. This way the best position price is further away and has attracted the best gain with the smaller positions adding along the way.

Other prefer a more uniform approach risking the same size % of capital per trade while others may put in some smaller positions first (testing the water) before putting in there larger position, this however is best done in lower volume markets where you can perhaps see some impact from your move.

So long as you are only adding to your winners and with an approach that feels right to you then you should be fine. There are no laws against adding positions along the way. It is not considered hedging (not sure if this is what was refered) which has implications with some brokers and laws.

Take Care

RT